Buffett Message Is ‘Do as I Say, Not as I Do’: Alice Schroeder

March 20 (Bloomberg) -- The last few years have been a
struggle for investors in Berkshire Hathaway Inc. Since the
March 2009 market low, the Standard & Poor’s 500 Index has risen
80 percent compared with 44 percent for Berkshire, even though
crashing stock prices and unprecedented volatility perfectly
suited Warren Buffett’s investing style.

Now Berkshire stock hovers at about a 10 percent premium to
the company’s estimated $110,000 per-share book value at March
31, 2012, (assuming the overall book value increases in a rising
stock market by about $10 billion this quarter) and perhaps
below a liquidation price. In essence, the market is placing no
value on Berkshire’s prospects.

I believe two basic problems have brought Berkshire to this
pass. First, Buffett’s investing record has been underwhelming
for the past few years, except for special opportunities linked
to his own reputation and relationships. Second, Buffett has
lost stature because of the way he uses his role as a public
figure. And both of these situations will be difficult to
reverse.

As he has for years, Buffett wrote in his most recent
shareholders’ letter, covering 2011 results, that he’s not going
anywhere anytime soon. This used to give investors comfort; now
it has them disconcerted. Buffett also wrote that his unnamed
successor will take over “when a transfer of responsibilities
is required.” Unless Buffett dies suddenly, this begs the
question, “required by whom?” to which the answer is:
Berkshire’s board. If the board handles its responsibilities
well, then Berkshire stock, already cheap at $122,115, will turn
out to be an even bigger bargain with hindsight.

Sweet Deals

During the financial crisis, Buffett cut some very sweet
deals that made billions for Berkshire. He bought preferred
stock from Goldman Sachs Group Inc., General Electric Co., Dow
Chemical Co., Wm Wrigley Jr. Co. (to finance its sale to Mars),
Swiss Reinsurance AG, and later, Bank of America Corp. He also
made a deal to reinsure 20 percent of capital-starved Swiss Re’s
business. He bought Burlington Northern Santa Fe Corp., which
investors applauded as a savvy move.

These, unlike stock purchases, were classic “only
Buffett” maneuvers, which arose partly from his relationships
and reputation -- bringing home how dependent Berkshire was on
Buffett’s deal-making ability at this crucial time.

Meanwhile, many of Buffett’s major stock picks for the past
five years, like Johnson & Johnson, Kraft Foods Inc.,
ConocoPhillips, and Wal-Mart Stores Inc. have been lackluster.

It used to be an “aha” moment when a Buffett stock pick
was revealed -- his 1980s buy of Coca-Cola Co. caused such a
sensation that trading in the stock had to be stopped. But the
recent $10.8 billion International Business Machines Corp.
purchase got only a yawn. The impression is that Buffett no
longer buys based on the brilliant insights of yore, but rather,
chooses conservative mega-cap stocks when they appear to be
moderately priced bets.

Chances are that most of the stocks will work out OK, and
that Buffett’s new asset managers -- Todd Combs and Ted Weschler
-- will gradually take on more responsibility and add value. For
several years, though, it would have been better to passively
invest your money in an index fund than to buy Berkshire shares,
which has restrained investors from wanting to pay much more
than book value for the stock.

Berkshire’s poor performance has meant something else --
that Buffett’s worst investing decision was to not repurchase
Berkshire’s own stock sooner than September 2011, when he
finally agreed to buy back company shares. Since then, the pace
of repurchases has been a crawl. Yet Buffett has been table-pounding investors to buy Berkshire because, he says, it is
significantly undervalued. He praised Jamie Dimon for buying
back JPMorgan Chase & Co. stock. And he criticized the late
Steve Jobs for not having taken his advice to buy back Apple
stock when it was undervalued.

Diminished Stature

Overhanging Buffett’s public role in the past few years is
the way Berkshire’s financial interests shaped his public
statements. At a time of crisis, Buffett had the opportunity to
put a capstone on his career as one of the greatest business
statesmen in history. Instead, his stature is diminished. To
wit: Buffett struggled to reconcile Berkshire’s sale of
derivatives linked to market indices with his longtime criticism
of leverage from derivatives, which was perceived as
hairsplitting.

He often criticizes Wall Street yet defended Berkshire
investments in Goldman Sachs and Moody’s Corp. before the
Financial Crisis Inquiry Commission. He praised other banks that
made bad mortgage bets, such as Bank of America and Wells Fargo
& Co. He attacked Irene Rosenfeld, the chief executive officer
of Kraft, for, in his view, overpaying for Cadbury Plc,
literally at the same time that Berkshire, by his own admission,
was paying a high price for Burlington Northern. Recently,
Buffett took his audience aback by criticizing those who have
lost homes to foreclosure, saying they victimized banks (that
Berkshire has invested in) by profiting from earlier refinancing
at cheap rates.

Another example of the statesman missing the mark took
place on Oct. 17, 2008, when Buffett wrote a New York Times op-ed urging investors to buy American stocks, as he was. For
decades, Buffett had avoided making market calls that required
short-term timing of the market. This one was especially risky,
coming only a month after Lehman Brothers Holdings Inc. had
filed for bankruptcy and while the global economy was in a
frightening tailspin.

To his credit, Buffett was trying to boost public
confidence in the markets. At the time, though, Berkshire was
selling far more equities from its portfolio than it was buying,
including large stakes in Johnson & Johnson, ConocoPhillips and
Procter & Gamble Co.

Buying Opportunity

Buffett later wrote that he would have preferred to keep
those shares, which were sold to fund the GE, Goldman and other
special deals. But investors who jumped into the market on his
advice would have waited another nine months just to break even.
They would have missed the market’s bottom in March 2009 -- the
greatest buying opportunity in decades. Nor did investors have a
way to participate directly in the special “buy American” deals
Berkshire was getting.

The 2008 Berkshire stock sales were the beginning of a $10
billion-plus selling streak that continued through the end of
2010, when Buffett announced his “all-in bet on America” through
the purchase of Burlington Northern. Because of the contrast
between Buffett’s bullishness on stocks and the way he was
putting Berkshire’s own money to work, Buffett appeared to be
“talking his book” to pump up Berkshire’s value and his
patriotic persona.

Now, Buffett is stumping for President Barack Obama and has
made himself the poster boy for higher taxes on corporations and
the wealthy, even while Berkshire has lobbied for tax breaks and
is battling the Internal Revenue Service on tax assessments at
its NetJets Inc. operation.

Buffett’s opinion on taxes is not new -- many people agree
with it -- and he has every right to express it. Yet he is a
huge beneficiary of low tax rates, which has spurred a torrent
of hypocrisy charges. Buffett’s ubiquitous presence and
inclination toward stunts hasn’t helped. It made international
news when his secretary sat with Michelle Obama at the State of
the Union address. Lately, he has switched to using his
housekeeper’s taxes as his foil.

Senior business leaders are so incensed about Buffett’s
visibility on taxes that it appears he is losing the support of
a key constituency that was receptive to his broader and,
arguably more important, ideas on capital management,
philanthropy and corporate governance. Presumably, the
Republicans are sharpening arrows to let fly at Buffett come
this fall, which may further damage his credibility.

If Buffett wants to be a player in politics, he’s got every
right. But it would be a shame if he forgot that his main legacy
is Berkshire Hathaway. His lasting impact will come from
focusing on the company and ensuring that the succession process
takes places gracefully. That requires more than simply choosing
a person. The transition of responsibilities also must be wisely
managed.

There are many ways to execute this, and changes may be
taking place already that aren’t visible. The stock price is
sending a quiet signal that shareholders will welcome any news
that lets them put a higher value on Berkshire’s future. Some
shareholders are growing publicly restive. The AFL-CIO Reserve
Fund submitted a proposal for a shareholder vote in May seeking
more transparency about Buffett’s successors and regular updates
to ensure the process will be board-driven.

Ultimately, it is Berkshire’s board that bears the
fiduciary responsibility. For its members, this transition
requires navigating one of the greatest governance challenges in
business. The board holds Berkshire’s value -- and Buffett’s
legacy -- in its hands.

(Alice Schroeder, the author of “The Snowball: Warren
Buffett and the Business of Life” and formerly a top-ranked
insurance analyst on Wall Street, is a Bloomberg View columnist.
The opinions expressed are her own.)